SoFi’s New Approach to the $1 Trillion Student Loan Market
On Saturday, I met with an executive from a Silicon Valley-based start-up, SoFi. By raising money from successful alumni at 40 schools across the country, SoFi lowers the rate students pay on their loans, creates high-yield investments for alumni, and increases the chance that alumni will help. students to find employment.
Jonathan Roosevelt, at the high-tech start-up Epesi Technologies in which I invested 12 years ago, created and leads the SoFi sales force as Vice President Alumni Relations. On March 31, I met Roosevelt for dinner at Woodside Bakery and Café, a Silicon Valley venture capitalist hangout.
We had dinner in the back under a tent. And periodic torrential downpours threatened to collapse that tent on the 25 diners who sat there. At one point, the noise and volume of the rain was so intense that everyone stopped their conversations and stared at the puddles that were rapidly forming near the edges. Luckily the owner was able to remove these pools from the tent before the whole thing collapsed.
While this is reminiscent of the pressures in the student loan market, there’s a limit to how far I’m willing to go to extend an analogy.
SoFi’s program is the brainchild of Mike Cagney, co-founder and CEO of SoFi, who was previously Vice President and Chief Trader of Wells Fargo (WFC). Cagney saw an opportunity to lower the rates students pay on their loans while creating an attractive investment opportunity for alumni. One of the clever things about this model is that it matches fund providers with their borrowers, school by school.
Schools benefit from SoFi because it increases alumni engagement with students. This is because alumni invest in a student loan pool and have a vested interest in their ability to make payments. As a result, these alumni will have an added incentive to help them in their careers.
So far the loan amount of $150 million for “enrollment, current and recent MBA, graduate and undergraduate students at approximately 40 universities across the United States.” One of the main benefits of SoFi’s programs is that they create a unique organization that only succeeds if students and their lenders do better.
According to Cagney, “the current student loan market is unsustainable”.
However, argues Cagney, SoFi solves this problem. He said: “Between the government – which accounts for 93% of student loans, students and schools, no party is particularly invested in the long-term success of the other. What is missing is a community solution where the interests of all members are aligned. Alumni provide the missing ingredient because they care deeply about both the students and the reputation of their alma mater.
And Cagney thinks SoFi’s service, the Community Loan Program, gives those alumni and students a powerful incentive to keep loan payments going. According to Cagney, “Alumni have a financial incentive for students to succeed beyond the existing natural affinity that already exists. High default rates directly affect alumni, meaning they have an incentive to hold the school accountable for its product – the education students receive – by helping to ensure that student debt upon graduation diploma is proportional to the value of their diploma on the labor market. And the community persists beyond any particular loan – it’s a long-term commitment.
SoFi started at Stanford University’s Graduate School of Business in the fall of 2011, raising and lending around $2 million. The SoFi pilot community brought together 40 alumni and around 100 students.
Ben Kessler, MBA student and SoFi loan borrower, said the combination of SoFi’s affordable rate and the school’s unique form of alumni access sets the program apart. “The SoFi application process was simple and its loans are some of the best around,” he said. “In addition, I have received excellent practical advice from former investors who have a direct economic interest in my success.”
Building on Stanford’s success and enthusiasm, SoFi is expanding its program to 40 schools and $150 million in loans in 2012. SoFi’s 2012 Community Loan Program includes:
- A 6.24% fixed rate loan for new students that drops to 5.99% in repayment with automatic payments.
- A 5.99% consolidation loan for young graduates.
- Minimum loan of $5,000, maximum of $200,000 (or until needed, whichever is less), without the need for a co-signer.
- Deferrals for continuing education, a graduation grace period, and community loan support options.
- Access to the SoFi online community that stimulates interaction between alumni and students on topics such as career advice or loan assistance.
Former investors earn returns of 5% to 8% – the amount increases with the risk. And Roosevelt told me that the default rate is low – “less than 1%”. Alumni can invest directly or through their IRA, which means the investment does not reduce alumni gifts to the school.
If that 8% return is available at such a low rate of risk, it seems like a very attractive place to put your reserve money when you consider that money market funds yield 0.4%. Meanwhile, SoFi could be a good deal for students, especially as it motivates lenders to give career advice to student borrowers.
And Roosevelt says his growing sales force of business school alumni from Stanford, Harvard, and Wharton are helping spread SoFi to top business school campuses in the United States.
If it can still deliver on its promise to improve conditions for former lenders, student borrowers, and their host universities, SoFi stands to gain a sizable share of this $1 trillion student loan market.